Tuesday, December 19, 2006

The JG Boswell Conundrum: Lots of Water, yet no Liquidity

JG Boswell continues to prosper in silence. The owner of some 142,000 acres of prime California land (along with 30,000 in Australia) continues to grow cotton and other crops, continues to pay your Cheap Stocks editor and some 500 or so other shareholders $3.50 per share in quarterly dividends, and continues to be rather tight lipped about its finances. We knew that would be the case going in, yet we continue to add to our holdings, little by little. The truth is, shares rarely trade, and it is difficult to find more than a handful for sale. Call it faith, call it gut feeling, or call it blind stupidity.

We call it value. At a market cap of around $600 million, and assuming an enterprise value of $800 million (exact figure unknown), that yields an estimated EV/Acre of $8000-$9000. As the share price has run up from the $300 range 3 years ago to about $700 per share, that figure is not as compelling as it once was (see our January 2005 research), but there is much more to the story than land.

JG Boswell’s cotton land is on the dry bed of Tulare Lake. Below Tulare Lake sits an aquifer that according to a recent report in Money Week titled “how to profit from the world’s water crisis”, is estimated to hold between 400,000 and 2,000,000 acre feet of water. (An acre foot measures the amount of water that would cover the area of one acre by one foot). This is enough water to serve 800,000 Californian families annually. The article also states that the California water agency values water at $10,000 per acre foot, giving Boswell’s aquifer alone a potential value of between $4 and $20 billion. That by the way, does not include the value of the land. While we could only hope this analysis is accurate, we discount it by our very nature.